Simplifying Complexity How economic policies are gamed
Oct 16, 2023
W. Brian Arthur joins the show to explore how economic policies are gamed. They discuss gaming systems, manipulation in the 2008 financial crash, and the vulnerability of economic systems. They also delve into the consequences of private control over financial systems and the need for understanding and addressing these issues.
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Equilibrium Bias Hides System Exploitation
- Economics focuses heavily on equilibrium assumptions that ignore incentives to exploit systems.
- Brian Arthur argues that assuming equilibrium blinds economists to how agents will change behavior to game new policies.
Ratings Firms Leaked Algorithms And Enabled Bad Securities
- Wall Street firms obtained rating algorithms and tweaked mortgage derivatives until they passed AAA checks.
- Ratings agencies became cozy with issuers, letting unsafe securities receive top grades before the 2008 crash.
University Rankings Can Be Inflated By Gaming
- A university jumped from ~265th to 13th in rankings without major changes in faculty or research.
- Arthur notes virtually every ranking metric can be gamed, for example by adding coauthors to papers in top journals.